Spiraling oil prices could skewer stocks

The crude reality is that gushing oil prices have emerged as public enemy No. 1 for the stock market.

Forget about the credit crisis. The parabolic rise in oil — it jumped $4.19 Wednesday to a record $133.17 a barrel — is fast emerging as the biggest threat to the budding stock rally. "It's the next black beast," says Milton Ezrati, senior strategist at money manager Lord Abbett. Adds Marty Cunningham, CEO of Hudson Securities, "Oil is the No. 1 concern."

Since rebounding from its March lows, the stock market has been relatively calm as oil punched through $100, $110, then $120 a barrel. But $130-plus oil seems to have triggered a "sell" signal, as investors suddenly became very worried about inflation and how higher energy costs could hurt consumer spending, the economy and corporate profits.

Indeed, $130 oil appears to have triggered a sell signal. Wednesday, the Dow Jones industrials plunged 227 points, or 1.8%, to 12,601. Tuesday, when crude briefly topped $130 for the first time, the Dow fell 199 points. The two-day Dow drop of 427 points was its worst since Feb. 28-29 in the heat of the credit crisis.

The record run-up in oil prices and corresponding drop in stock prices Wednesday came on a day when the Senate grilled top executives of the five largest oil companies about the pain rising gas prices is causing on Main Street.

Stocks also were hurt by the release of the minutes of the Federal Reserve's last meeting in late April. The Fed lowered its growth forecast for the remainder of the year, raised its inflation targets and also said that, barring a "significant weakening of the economic outlook," it was done lowering short-term interest rates.

•It jeopardizes the economic recovery. With the worst of the credit crisis allegedly behind, investors were looking for a brighter outlook in the second half of 2008. But as higher gas prices take an ever-bigger bite of the disposable income of consumers, who account for nearly two-thirds of economic activity, the recovery is in doubt, Ezrati says.

•Predictions of $200 oil add to the anxiety. Citing a surge in demand and supply constraints, Goldman Sachs predicts a "super spike" in coming years that could drive prices as high as $200 a barrel. This week, oil tycoon T. Boone Pickens predicted oil would hit $150 by the end of the year. Such talk could spur traders to keep buying, says Cunningham.

•Fear of unknown causes uncertainty. Wall Street is divided on whether the rise in crude prices is mainly a demand issue or whether speculators are causing the price to inflate artificially. That causes confusion. "If you can't explain the higher prices, it's harder to forecast," Ezrati says.